Cookies Food Products, Inc. v. Lakes Warehouse Distributing, Inc.

Cookies Food Products, Inc. (Cookies), an Iowa close corporation and producer of barbecue sauce, was founded in 1975. Duane Herrig (defendant) was an early shareholder and also owned a car parts distributing company, Lakes Warehouse Distributing, Inc. (Lakes) (defendant). In 1977 Herrig persuaded Cookies to let Lakes take over exclusive distribution of Cookies’ sauce. Sales increased dramatically. In 1982, Herrig became the majority shareholder and replaced 4 out of 5 board members. Under Herrig’s control, Cookies took four actions which were later contested by minority shareholders (plaintiffs). First, the board extended the exclusive distribution arrangement with Lakes on the same terms previously agreed to. Second, needing additional short-term storage, the board agreed to pay Lakes the going rate to use Lakes’ storage facilities. Third, Cookies agreed to pay Herrig a per-case royalty for a taco sauce which Herrig had created and added to Cookies’ product line. The royalty was slightly larger than that paid for the barbecue sauce, but the taco sauce was more profitable for the company. Finally, the board approved a $1,000 per month consulting fee for Herrig and a two percent increase in the amount paid to Lakes under the distribution agreement. Several minority shareholders sued Herrig and Lakes on behalf of Cookies, arguing that the four actions described above constituted improper self-dealing without disclosure, and that excessive amounts were paid to Herrig and his company. Testimony at trial suggested that the services Herrig and Lakes provided might have been obtained for less from other providers. After a trial, the district court ruled that Herrig had breached no duties to Cookies or the minority shareholders, because the actions under review were fair and in fact beneficial to Cookies. The minority shareholders appealed.